The spot gold price dropped to US$1,733.86 an ounce yesterday – – that’s a drop of around $30 an ounce or 1.70% – after the US reported strong labor force figures.

But the overall outlook for gold is still strong according to Minelife founding director and senior research analyst Gavin Wendt who said the catalyst for the “mid-cycle correction” is already ancient history.

“My fundamental view on gold is that the outlook is still robust, it is still strong, and the reason is that we have debt levels that are extraordinarily high in the world’s major economies, that debt has to be serviced and that level of debt is growing,” he said.

“At the same time, we’ve got uncertainty with respect to the impact of COVID variants on the world economy, and the US economy in particular.

“And whilst we’ve seeing strong labor force figures – which seems to have been the catalyst for the near-term correction in the gold price – that’s effectively ancient history.

“We’re charging forward, with the infrastructure spending that’s going to come by Biden economically everything’s going to be great – so why do we need gold?”

“But in the current environment any sort of economic data, particularly in the age of COVID is extremely volatile, it can move around, and it can correct itself very quickly.”

Negative real interest rates a positive catalyst

“If you look at things like yields in the United States, they’re at a record low level, they’re negative now and to me that is a very strong indicator and a very positive fact in terms of the outlook for the gold price,” Wendt said.

“One of the things we’re also looking at in the United States is interest rates which are pretty close to historical lows.

“At the same time, we’ve got inflation and that means that interest rates in the United States are negative.

“Once interest rates in the US are below the level of inflation that’s negative real interest rates – and typically when interest rates are negative like that, it’s a very positive catalyst for the gold price.”

Wendt predicts that interest rates will stay low and the US dollar will stay low, which provides a fundamentally good environment for the gold price going forward.

“Markets will always look at these bits of economic data as a justification for a positive outlook, but beneath all of that, I think there’s still a very, very strong argument for gold,” he said.

Inflation could mean short-term volatility

Lion Selection Group fund manager Hedley Widdup thinks that inflation will be a key driver going forwards.

“Historically the fundamental gold has been most strongly influenced by is real interest rates,” he said.

“Bond rates spiked earlier this year which sent a shudder through the gold market because traditionally the bond market has been a bellwether for the intersecting outlook for official rates, economic strength and all the metrics that fall off those – currencies, equity prices, etc.

“So, the bond rate spike was seen as the smartest market beginning to price inflation.”

Essentially, the issue is that sovereign balance sheets have expanded massively in the last decade because of the stimulus rolled out in the aftermath to the GFC – and more recently COVID.

“Movement of official rates has become a key sensitivity to massive asset markets globally – equity markets in the US and probably the real estate markets in Australia even more so,” Widdup said.

“If inflation takes a grip, if central bankers hesitate around official rate increases then there is a picture of inflation growing unchecked.

“So, I think the outlook for gold is volatile short term whilst the buyers and sellers influence within a range but there is insufficient of either to move gold above or below resistance, then strong long term on the basis of a strong return of inflation.”

Brookville Capital’s Simon Popple seconds the short-term volatility.

“I think the outlook for the gold price depends on a number of factors – some bullish and others bearish,” he said.

“If the world recovers from the pandemic I think the price could go lower.

“But if there are new variants and there’s no solution to the debt problem prices are likely to increase.

“I’m expecting a lot of volatility over the next 12 months.”